Ed Moltzen

The Chart

October 10, 2006

Since Sept. 11, Dell has announced it is under investigation by the SEC, the U.S. Attorney for the Southern District of New York and the Audit Committee of its own board of directors. It may have to re-state prior earnings. It is delinquent in filing its mandatory quarterly report with the SEC and NASDAQ has put Dell on notice that its stock may be de-listed.

Add to that the fact that its revenue growth over 18 months through August plummeted from 19 percent to five percent, and that it's profit was down by about 50 percent in its most recent quarter.

Bad news for the stock, right?

Wrong.

Since Sept. 11, despite almost nothing but bad news, Dell's stock has jumped by about 12.5 percent, from $20.62 to $23.56 as of the market's Oct. 9 close. With these gains have come increasing discussion over Dell's cash situation.

During its most recent conference call with financial analysts in August, Dell CFO Jim Schneider said the company would borrow money during this quarter to "augment liquidity." That prompted this response from Ben Reitzes, an analyst with UBS Securities: "Your comments on borrowing seem to be a wake-up call. You guys don't seem too concerned."

Why would a profitable, $60 billion company need to borrow money to fund operations?

Schneider and Dell CEO Kevin Rollins downplayed the fact that the company had decided to borrow, noting that most of its cash is overseas and that bringing it back into the U.S. would carry a hefty tax penalty. Business as usual, was how they described it.

But is Dell's cash flow from operations business as usual these days? In a span of three quarters, through August, Dell's cash flow from operations dropped from $1.6 billion to $700 million -- it's lowest cash flow from operations in about two years. By way of comparison, Dell rival Hewlett-Packard has reported steady cash flow, ranging from about $3 billion to $2.6 billion.

Reitzes declined an interview to talk about Dell's cash flow, and another analyst I called said he didn't believe Dell had any cash problems at all. Vincent DiCarmine at Seeking Alpha runs the numbers and said he believes Dell is in a strong cash position:

Management has always been able to squeeze prodigious amounts of cash flows despite modest operating margins.

They have a negative 44 days cash conversion cycle which means that their sales are converted in hard cash 44 days BEFORE the sale. How is the possible? Low inventory and strong bargaining power over their suppliers on payment terms. On the other side, their clients are paying cash in advance or shortly after delivery of the products.

Right now, though, one of its biggest suppliers, Intel, is going through a transition in its relationship with Dell. (Dell used to exclusively use Intel chips in its PCs and servers, now it doesn't, and some analyst believe Intel has cut off as much as hundreds of millions of dollars from the market development funds it used to provide the PC maker.) And Dell is spending furiously - $150 million this year - to try to assuage customers who have been turned off by Dell's own admitted declines in its service quality.

Suppliers and customers may not be as forgiving as in the past.

The Internet message boards have also begun discussing Dell's cash position. On Yahoo!'s Dell stock message board, one commenter noted the company's explanation that it intended to borrow $1 billion to fund operations because it didn't want to repatriate funds from overseas and pay all that tax:

For some reason, Dell keeps wanting extra billion dollar credit lines. ("sorry, left wallet in my far east suit; cost me more than it's worth to go fetch it. OK if you sub me $1bn? You know I'm good for it.")

Throughout its history as a company, Dell has been good for it. But there's one more potential smudge in the company's cash flow window: As a result of Dell's inability to file a 10Q with the SEC (the further result of all those investigations), Standard & Poor's has put Dell on "CreditWatch with negative implications."

We may need to wait until Dell's next quarterly conference call with analysts to explain whether that will make it more expensive for it to borrow money, "augment its liquidity," and keep cash on hand from its growing list of issues.